Toward a Knowledge Based Theory of the Firm

  • Grant R
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Given assumptions about the characteristics of knowledge and the knowledge requirements of production, the firm is conceptualized as an institution for integrating knowledge. The primary contribution of the paper is in exploring the coordination mechanisms through which firms integrate the specialist knowledge of their members. In contrast to earlier literature, knowledge is viewed as residing within the individual, and the primary role of the organization is knowledge application rather than knowledge creation. The resulting theory has implications for the basis of organizational capability, the principles of organization design (in particular, the analysis of hierarchy and the distribution of decision-making authority), and the determinants of the horizontal and vertical boundaries of the firm. More generally, the knowledge-based approach sheds new light upon current organizational innovations and trends and has far-reaching implications for management practice. Theories of the firm are conceptualizations and models of business enterprises which explain and predict their structure and behaviors. Although economists use the term 'theory of the firm' in its singular form, there is no single, multipurpose theory of the firm. Every theory of the firm is an abstraction of the real-world business enterprise which is designed to address a parti-cular set of its characteristics and behaviors (Machlup, 1967). As a result, there are many theories of the firm which both compete in offer-ing rival explanations of the same phenomena, and complement one another in explaining differ-ent phenomena. Economic theories of the firm are concerned primarily with predicting the behavior of firms in external markets. In particular, the neoclassical theory of the firm uses partial equilibrium analysis to predict the firm's purchase decisions in input markets and supply decisions in output markets. Organizational theory addresses aspects of the

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  • Robert M Grant

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